How the JOBS Act affects startups

The Jumpstart Our Business Startups (JOBS) Act made waves when President Barack Obama signed it earlier this year, but its impact on startups in Minnesota and nationwide may be limited.

That was the general consensus of the three panelists in an hour-long workshop at last week’s Minnesota Venture & Finance Conference, during which Tom Martin and Jim Grant from Minneapolis law firm Dorsey & Whitney and Scott Ebert from accounting firm Baker Tilly Virchow Krause explained the bill’s different provisions to the roughly 30 attendees.

Signed into law April 5, the JOBS Act is a combination of six previously separate bills meant to aid startup and small businesses by peeling back Securities and Exchange Commission (SEC) regulations.

Only three of the bill’s six provisions are now in effect. And Martin, co-chair of Dorsey & Whitney’s venture capital and emerging company group, argues that only three provisions are truly important to business: Titles I, II and V.

“There are mistakes. It is not a work of art,” Martin said.

“It’s a lot of unknown,” said Ebert, leader of Baker Tilly Virchow Krause’s SEC practice. “It’s probably more advertising and hype on what it really does and what it actually can do.”

Here’s some highlights of the JOBS Act:

Title I: “The IPO On-Ramp” — in effect

The first provision of the JOBS Act is meant to help businesses go public by creating a new category: emerging growth companies (EGC). Businesses that fit the requirements of an EGC benefit from reduced financial disclosure and executive compensation requirements for five years after going public or until the company grosses more than $1 billion in revenue.

It also gives companies a chance to get confidential feedback from the SEC on initial public offering registration statements before filing. Previously, those forms were almost immediately made public.

Martin said Title I can help save on some expenses when companies choose to go public, but the benefits are limited.

“Has it turned the IPO around? We all know it has not.”

Title II: General solicitation for capital — not in effect

Martin said Title II will be groundbreaking when the SEC implements it, which it’s “on the cusp” of doing.

This provision gets rid of a SEC rule that prohibited small businesses from advertising that they were seeking capital. Companies will now be able to publicly state plans to raise funding, so long as it targets accredited investors. Such investors are high-net-worth individuals.

Martin called the SEC’s prior regulation “absolutely primitive,” and said the change could help in a big way.

“That opens up a huge market for capital.”

Title III: The “crowdfunding” measure — not in effect

Panelists were not particularly optimistic about crowdfunding, which will allow entrepreneurs to raise capital from large pools of small investors through registered “funding portals.”

Websites such as Kickstarter already allow startups to seek donations, but they previously weren’t allowed to raise equity investment. However, panelists said they don’t expect crowdfunding to be as successful as sites such as Kickstarter.

Rules the Senate imposed on the provision before passing it make it “dead on the table,” Martin said. Rules included that companies seeking between $100,000 and $500,000 in capital need independent accountants to review their financial statements, and that firms could only raise up to $1 million via crowdfunding. The regulations were included due to concerns that crowdfunding could become a vehicle for fraud schemes.

Grant, an associate in Dorsey & Whitney’s corporate group, said the legislation will still help some companies raise capital. However, he was unsure about how much demand there would be for crowdfunding in the United States.

“Maybe some young people will think it’s sexy,” Martin said.

Title IV: “Regulation A+” — not in effect

This provision gives the SEC authority to exempt more companies from registering to go public by raising the threshold from $5-million public offerings to $50 million.

The problem, Martin said, is that there’s no deadline for the SEC to implement the change, which means business owners could be waiting a long time. And when it does go into effect, he’s not sure many companies will use it, because it doesn’t provide a state preemption for registration.

Title V: The Facebook problem — in effect

Facebook Inc. CEO Mark Zuckerberg’s hand was forced to register with the SEC this year when the number of shareholders crossed the regulatory threshold of 500.

Title V of the JOBS Act bumps that up to 2,000, provided no more than 500 of the investors are nonaccredited.

The change allows private companies to stay private longer if they want, Martin said. It also exempts investors who bought shares through crowdfunding from being counted. Shares issued through employee benefit plans also are exempt.

Title VI: Special Title V exemptions for banks and bank-holding companies — in effect

The final provision of the JOBS Act gives banks and bank-holding companies special treatment by putting no restrictions on the amount of nonaccredited investors it may have.